China’s Latest Default Dodge Helps Cut Borrowing Costs

Li Keqiang, China's premier, has unveiled measures which may help avert collapses in one of China’s most leveraged sectors, real estate, in May introducing central bank loans for low-income housing and lowering reserve requirements for some qualified banks. Photographer: Chris Ratcliffe/Bloomberg

July 24 (Bloomberg) -- Corporate borrowing costs in China
fell the most in a week after the country averted the second
default in its onshore bond market, fueling speculation the
government is prioritizing market stability over liberalization.

The extra yield over sovereign notes AAA-rated companies
pay to sell one-year notes fell three basis points yesterday to
114 basis points, the biggest decline since July 16, according
to Chinabond data. Huatong Road & Bridge Group Co., based in the
northern province of Shanxi, yesterday paid all principal and
interest on a bond it just last week had warned it may fail to
repay, according to four people familiar with the matter.

While Premier Li Keqiang has pledged to allow the markets
to play a bigger role in the economy, Huatong’s last-minute
payment follows similar cases this year as the government aims
to bolster slowing economic growth. Building-materials maker
Xuzhou Zhongsen Tonghao New Board Co. averted a default in
China’s private junk-bond market in April after its guarantor
paid up, and investors in a product arranged by China Credit
Trust Co. were bailed out in January days before it came due.

“The local government probably repaid the accounts
receivables they owed Huatong,” said Shi Lei, the head of
fixed-income research at Ping An Securities Co., a unit of the
nation’s second-biggest insurance company. “They knew that if
the company had defaulted, it would have had very bad impact.”

Safeguarding Stability

Short-term borrowing costs leapt by the most in eight
months last week after Huatong flagged in a July 16 statement it
may have trouble meeting its financial obligations. One-year
top-rated commercial-paper yields rose 26 basis points to 4.957
percent. After the company repaid the 400 million yuan ($65
million) of notes yesterday, the yields dropped 3 basis points
to 4.917 percent.

Huatong had been making efforts to raise the funds, with
help from local governments and bond underwriters, company
official Geng Naizhuang said by phone July 18. An official at
the company today declined to comment on the source of the funds
when asked about the repayment, and wouldn’t give his name.

As the government tries to safeguard stability, it’s
unlikely there will be defaults among publicly traded bonds like
Huatong’s, according to Ping An’s Shi.

Balancing Risks

Shanghai Chaori Solar Energy Science & Technology Co. was
the first to default on onshore bonds in March when it didn’t
meet part of an interest payment on 1 billion yuan of notes on
the exchange-traded market. Huatong’s securities, in contrast,
were on the interbank market, the country’s biggest bond bourse.

China’s policy makers are trying to balance the risk of
letting weaker companies fail with steps to ensure stability in
the nation’s $4.2 trillion bond market. Chinese firms have the
most debt globally after increasing borrowings to $14.2 trillion
as of Dec. 31, surpassing the U.S.’s $13.1 trillion, Standard &
Poor’s said in a June 15 report.

Premier Li has unveiled measures which may help avert
collapses in one of China’s most leveraged sectors, real estate,
in May introducing central bank loans for low-income housing and
lowering reserve requirements for some qualified banks.

“A company won’t default when both local governments and
banks try to save it,” said Yang Feng, a bond analyst in
Beijing at Citic Securities Co., the nation’s biggest brokerage.

Financial Strains

At the same time, China will experience more companies like
Huatong running into repayment difficulties as the economy
slows, he said.

Growth in China is set to cool to 7.4 percent this year,
the slowest in more than two decades, according to the median
estimate in a Bloomberg survey. The government is aiming for
expansion of about 7.5 percent, and fourteen of 22 respondents
to a Bloomberg survey this month said it will need to
“somewhat” increase stimulus to meet that goal. President Xi
Jinping said in May the government will pursue growth and
reform, while preventing risks in order to preserve social
stability.

The reaction in the weeks after Chaori’s default was more
muted with yields climbing 21 basis points to 5.31 percent in
the five days ended March 21. Chaori missed its payment March 7
and has since had a restructuring application accepted by a
Shanghai court.

A Huatong default would have differed from Chaori’s in that
it would have been the first company to fail to pay both a
bond’s interest and principal, and also the first to default in
China’s interbank note market.